Ultra-Wealthy Focus on Quality Advisory Services, Not Investment Returns – Published in Noozhawk on Monday, December 9, 2013

When I began my career in 1990 as a stockbroker at Lehman Brothers, we had a lot of industry sayings that were thrown around the office to describe various aspects of the investment business. We often used storytelling to drive home a point about an investment, when trying to convince a client that the purchase was in their best interest.

One that really stuck with me had to do with buggy whips — the whips used by those riding in a buggy pulled by horses, before automobiles. Back in that era, there were many companies that made buggy whips.

As cars began to appear on the scene, the weakest buggy whip companies quickly folded. One by one, as cars became commonplace, the buggy whip makers closed their doors. You can imagine that those making the finest-quality buggy whips held out. After all, they were really good at making buggy whips. They couldn’t see — or refused to accept — that the world had fundamentally changed, making them irrelevant.

Today, we see a similar dilemma facing investment management companies. The financial services industry has become commoditized to a certain extent. While there are no signs that investment management services are going away anytime soon, the fundamental structure of the business has changed, and changed for good.

The ultra-wealthy tend to be the trendsetters when it comes to financial services. The first automobiles were purchased by the wealthy who could afford the hand-built cars’ price-tags. Regular folk wanted cars, too, but could not afford them. Later, Henry Ford developed his assembly line methods for producing cars that the average person could afford, and soon almost everyone could buy a car.

The investment business has developed in a similar fashion — what at first had been investment management services that were exclusively offered to the ultra-wealthy, have now been made available to virtually anyone with even the smallest of portfolios. Just as Ford found a way to offer cars to the masses by bringing the cost down, so, too, have investment management firms found ways to package their services for the average investor, bringing fees down dramatically in the process.

There are still those investment management firms that are holding out, just as the buggy whip makers chose to ignore the changing landscape in their day. But the business has changed.

The ultra-wealthy, and, increasingly, the entire investing public, no longer look to investment managers to add alpha — generate returns in excess of market returns. Even if a manager has a documented track record of consistently beating the market, and even if that positive performance was generated without assuming additional risk, investors just don’t care. Sure, everyone wants to make money, but from a practical standpoint, clients are no longer making investment decisions based on performance.

What the ultra-wealthy want is expert, reliable, trustworthy, honest, independent advice. They want advisers who have broad-based expertise in all areas of wealth management, including trust services, financial planning, estate planning, tax planning, educational planning, gifting and more. They really want and need a personal CFO (chief financial officer) who can coordinate and advise them on all aspects of their total financial situation. Investment management is simply one aspect of this total package of services. Further, investment management is a consequence of the planning process, to be implemented only after a comprehensive wealth management plan has been completed.

The implementation of the investment portion of that wealth management plan can be accomplished through the use of multiple investment management firms that meet specific criteria established through the objective setting and risk profile analysis that, again, occurs during the development process for the comprehensive wealth plan.

The evolution of the financial services industry, or to be more precise, the changing needs and expectations of the ultra-wealthy and the rest of the investing public, has not resulted in a lessening of the importance of investment management. The ultra-wealthy still expect their assets to be invested properly. What has changed is the decision-making process used by investors when choosing an adviser — their decisions are no longer influenced by investment performance, at least not positive performance. If a manager materially underperforms his or her stated benchmark (the index that most closely represents the market performance for their investing style), prospective clients will certainly take note.

The ultra-wealthy, in my personal experience, are much more concerned with minimizing the risk of significant losses, maintaining their wealth and generating a reasonable return over time to maintain their lifestyle. They are already wealthy, and therefore do not need an investment manager to make them rich.

As the investment management industry has adjusted to changing investor attitudes, needs and expectations, investment vehicles have been developed that allow for packaging and pooling assets, which in turn has allowed firms to drastically reduce fees. Competition for assets in general has further reduced fees to a point where today, the business has become commoditized. There are so many investment management firms offering similar approaches to investing that it is virtually impossible for investors to see any meaningful differences among them.

With this in mind, advisers who want to survive and thrive in today’s competitive financial services industry will do well to reflect on the buggy whip example, and retool their businesses to offer what investors need and expect: high-quality advice from experts who know what they are talking about and who can be trusted to plan, coordinate and execute a truly comprehensive wealth management plan.

About Us

Allen Wealth Management, LLC, (AWM), an investment advisory firm registered with the state of California, is located in Santa Barbara, California. At AWM, we strive to provide a personalized, thoughtful, and professional experience for our clients.